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Economic Stress on Family Businesses in Laos

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Economic Stress on Family Businesses in Laos Information Management and Business Review Vol. 2, No. 1, pp. 12-18, Jan 2011 Understanding and strengthening the health of family businesses in Laos *John Walsh1, Nittana Southiseng2 1,2School of Management, Shinawatra University, Thailand *[email protected] Abstract: More than 90% are family-businesses and are concentrated in retail, handicrafts, and personal services sectors. More than half are female-owned and managed, although baseline information about business and family management are limited. This paper reports on qualitative research aimed at understanding family business practices, impact of education in family businesses in a range of activities in Laos. Most such businesses remain based at or very close to home, and along the main road with any growth managed by hiring additional family members. Firms were run on traditional lines, while the management decisions were generally taken by senior family members depending on their existing prejudices. Although family businesses in Laos are still largely disorganized, they play critical roles in creating job opportunities and boosting household income for local residents as well as helping family members to utilize their existing talents, time, and resources. In promoting this sector, the Government of Laos has significant roles in developing policies, establishing a relevant governing agency, and encouraging training and involvement from the private sectors and from key international organisations. Keywords: Business development, Entrepreneurial development, Family business, Laos, SMEs 1. Introduction Despite recent evidence to the contrary, Laos remains a small and poor country. For example, in 2009, the World Bank reported that the real GDP growth of Laos reached 6.4%, which was the second highest in the East Asian region after China. The most recent estimate of per capita GDP in Laos is $ , – or the equivalent of $ per month. Laos was able to mitigate the direct impact of the world economic crisis starting in 2008 through sustaining the demand for Lao exports, including copper and gold destined for China, garment products for Europe and electricity for Thailand, as well as maintaining the tourism industry and overseeing the increase of expenditure associated with the construction of infrastructure to facilitate the 25th SEA (South East Asian) Games in Vientiane in December 2009 (Phouthonesy, 2010). However, the Laotian economy remains largely dependent on a small number of large foreign firms involved in resource extraction, government bodies, non-governmental organizations (NGOs) and aid organizations in addition to the great majority of enterprises, which are very small and often family-based. As indicated in the study of Phimmavong and Chanthavong (2009), the highest number of registered enterprises in Laos belongs to the trading sector (65% of the total of economic units), followed by manufacturing (29%), agriculture (3%) and services (3%). The great majority of the people involved in economic enterprises, in other words, are involved in petty trading of one sort or another. This ranges from market or street level vending to shop- keeping and more sophisticated operations also integrating manufacturing and distribution. Small and Medium Enterprises (SMEs) in Laos are classified by turnover, assets and the number of employees: (1) micro enterprises have from 1-3 employees; (2) small enterprises are classified as those with an average number of employees not exceeding 19 persons, with total assets not exceeding 250 million kip, or an annual turnover not exceeding 400 million kip; (3) medium enterprises are those with an average number of employees not exceeding 99 persons, total assets not exceeding 1.2 billion kip or an annual turnover not exceeding 1 billion kip; (4) large enterprises are defined as having 100 staff or more. According to Souvannavong (2006), SMEs in Laos accounted for 95% of all enterprises in the country. The SME sector comprised of 16% medium enterprises, 58% small enterprises, and 21% micro enterprises. More than 90% are family businesses and are concentrated in the retail, handicrafts and personal services sectors. Family businesses, in other words, dominate the economy in terms of numbers and employment and the majority of them are fairly basic in their operations. In a Lao economy that sees greater levels of competition as a result of increased circulation of goods; family-owned businesses are under greater pressure to remain competitive 12 and to upgrade the quality of their offerings. Increased competitive pressure can have an impact on stress levels felt both by the business operator and by other family members. This makes it important, therefore, to understand the types of family business in operation in Laos and the pressures that they face, with a view to determining means of helping those businesses improve in sustainability and profitability. Consequently, this paper aims to explore and understand further the actual practices of family businesses in Laos. Firstly, the study identifies the general profile of family business entrepreneurs; secondly, it identifies the managerial characteristics of family business owners and the challenges they are currently facing. Finally, the study aims to identify the key factors that might improve the family businesses. 2. Literature Review What is a Family Business? Achieving an inclusive and accurate definition of a family business has proved problematic. Integrating a variety of different possible relevant areas of investigation, Astrachan, Klein and Smyrnios (2002) posited an F-PEC scale of authenticity that might be best described as belonging to the business studies tradition of eclectic paradigms. In a subsequent review of different types of family business, Howorth et al. (2010) considered the various parameters of family membership of a firm and the roles within it that might be taken. The elaboration of the link between the conceptually complementary concepts of family business and business family has also been undertaken (Litz, 2008). These complications have been avoided by the Lao government by adopting a simple but inclusive definition provided by the International Labour Organization (ILO). It is explained in the Study on Generating Employment through Micro and Small Enterprise and Cooperative Development in Lao PDR (ILO, 2006) that a family business is defined as a business owned and managed by one or more family members. With Lao culture emphasizing the values of collective action, family-operated businesses are attractive and this contributes to their prevalence among MSMEs. In a family business, enterprise owners and unpaid workers represent more than 90% of the MSME sector workforce. In addition, family businesses in Laos have two systems: the family system and the business system. Family system: the decision-making characteristics of this system are generally influenced by 'emotional judgments'. A person's status is determined by seniority and position within family relationships. Her/his rewards are determined by personal honesty and loyalty. Being a member of the family means, of course, that she/he is a member of the business for life. Business system decision-making, on the other hand, tends to exclude emotional bias and the employee's status is determined by a particular kind of contract or by shares held in the business, both of which may well be temporary in nature. Rewards are based on performance and membership is based on qualification and is likely to be limited in time. Two common problems often found in this kind of system are miscommunication and conflicts among family members and the inability of parents to persuade their sons or daughters to succeed her/him in the ownership and leadership of the business. The family business system most commonly seen in Laos is clearly influenced by what is known as the Chinese family business (CFB), which features opportunistic diversification, autocratic decision-making, and spinning off new ventures for family members to take on as managers when they are ready for such responsibility or else to take advantage of emergent market opportunities. The CFB is characterized by nepotism, paternalism and family ownership (Wong, 1993). As a result of the long-term diffusion of Chinese principles and ethnic Chinese people, the CFB pattern and variants of it may be detected in many East Asian societies. Promoting Local Entrepreneurs in Laos Tham (2009a) reported in the Vientiane Times that the number of SME operations in Laos is increasing in size and performance is increasing in effectiveness despite the global recession. A total of 49% of 400 SMEs were growing in 2005, whereas 59% of 500 SMEs experienced business growth in 2007. The Small and Medium Enterprises Promotion and Development Office (SMEPDO), an agency of the Lao government, has simplified the registration system for business start-ups. It appeared to be easier to navigate than in the past and not many documents are needed. SME expansion is seen as the backbone of economic growth of Laos and, consequently, it is believed that positive growth in the Lao economy depends on the development of this sector. Nevertheless, it is still the case that some businesses had to pay 3% of their investment cost to a middleman or broker for document work and to register for a license for the business start-up. This remains a 13 significant figure. For this reason, the government has to pay attention to promoting and facilitating MSME growth quickly by improving legal frameworks to allow their establishment, together with establishing an online registration system in the fiscal year of 2009-2010 and a one-stop service unit for foreign investors at the Ministry of Planning and Investment. According to economic data from 2006, 83% of Lao workers were employed in a total of more than 126,000 SMEs. This means SMEs contribute to both national economic development and employment generation in Laos. However, Tham (2009b) reported that SMEs still needed to acquire investment funding from banks and financial institutions, which tended only to provide short-term funding. It is also the case that active people in SME research are still limited to a small group numerically.
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